Stankey

AT&T’s incoming CEO John Stankey has a message for America: If you are unwilling to pay $15 a month for AT&T’s HBO Max, you have a low IQ.

Stankey made that declaration pitching the new service, set to debut in May. The fact the video platform is late to a market already crowded by Netflix, Hulu, and Disney is just part of the challenge. That $15 price point is a bigger one.

If there is any company in the telecom business that can prove consumers are sensitive to price hikes and bill shock, it is AT&T. Its frequent rate hikes for its DirecTV satellite service and various streaming TV platforms have caused a customer exodus. More than a quarter of DirecTV customers have left and, even more stunning, well over half of AT&T’s streaming TV customers have dropped the service. In late 2018, DirecTV Now (today AT&T TV Now) — AT&T’s cord cutting TV alternative, had 1.8 million customers. As of last month, that number is down to 788,000 and still falling.

AT&T has repeatedly claimed it wants to focus on “high value” customers, which may explain why it remains confident its $15/mo HBO Max service will do well, despite being the most costly streaming service in the market.

Stankey’s predecessor, Randall Stephenson, will exit as AT&T’s CEO in July. He leaves a much larger conglomerate than what he started with. AT&T has diversified from its telephone and wireless portfolio with several major acquisitions, including DirecTV — the satellite TV service, and Time Warner (Entertainment), a Hollywood studio and entertainment giant. The result is a company loaded with debt and a revolt by activist investors that question the wisdom of creating the 2010s version of AOL-Time Warner.

Elliott Management Corp., the activist investment firm that has proved itself a nuisance to the expensive dreams of several rich and powerful CEOs, does not see a viable marriage between AT&T’s profitable telecommunications business and a media and entertainment company. It took its concerns public in 2019, calling on AT&T management to get back to the basics.

Stankey’s approach seems to be a willingness to embrace the newest members of the AT&T family, for now, while also reassuring investors the shopping spree of mergers and acquisitions is over. Bloomberg News reports his views seem to have won Elliott Management over. At the same time, Stankey has to convince investors and the public he is competent at running a media company. The jury is still out on that:

Bloomberg:

At a town hall with HBO employees last year, Stankey said the network had to dramatically increase its programming output, comparing the work ahead to childbirth. Once, when a Time Warner veteran criticized an idea during a meeting, Stankey replied, “I know more about television than anybody.”

[…] But over the past two years, Stankey has tried to acclimate himself to the glitzy world of entertainment. He started watching HBO’s “Westworld” and “Succession.” He could be seen mingling with HBO talent at glitzy Manhattan premiere parties. At an industry event, he wore a pin featuring a Looney Tunes character — a WarnerMedia property — on his jacket lapel.

While giant cable company mergers unexpectedly took a breather in 2017, Fierce Cable predicts this year isn’t likely to be a repeat of last year.

“With polls showing Democrats poised to begin sweeping back into power with the 2018 midterm elections, look for cable operators to make hay on the current regulatory climate and start turning their rivals into that most precious of resources: scale,” writes Daniel Frankel.

With time for large cable operators to get easy approval of merger deals from deregulation-minded Republicans potentially running out, 2018 could bring dramatic consolidation in the cable industry, with Comcast a likely buyer and Charter Communications a potential seller… if the offer is good enough.

Many industry observers expected the first year of the Trump Administration to be a banner year for cable mergers, especially with the entry of Altice, a European cable conglomerate known for its willingness to overpay to acquire cable operators. Altice has since run into significant financial challenges and investor blowback, forcing the company to shelve acquisition plans for now and focus on debt reduction and developing a stronger business plan to operate its ailing cable and wireless properties in Europe. Altice USA, which owns Suddenlink and Cablevision, has not shelved its plans to upgrade many of its customers to fiber to the home service, but is also no longer seen as an immediate bidder for Charter, Cable One, or WideOpenWest.

Fierce Cable expects Comcast to respond to AT&T’s merger with Time Warner, Inc., assuming the deal successfully overcomes Department of Justice objections in court, and 21st Century Fox’s asset sales to Disney. Both transactions threaten to consolidate programming production and distribution around an even smaller group of media giants, which could challenge Comcast’s NBCUniversal unit as well as the cost of cable programming networks. Comcast has shied away from acquisitions after an embarrassing failure of its attempt to buy Time Warner Cable a few years ago.

If Comcast wants to build scale, it would naturally target an acquisition of Charter Communications, the second largest cable company in the country. The deal would give Comcast dominance over the New York and Los Angeles media markets and broadband service provision across most major American cities. Comcast could also seek a less controversial acquisition of Cox Communications, one of the few major independent cable companies left. But Comcast could also seek acquisitions in Hollywood to bolster its production capabilities.

Most other cable acquisition options would be considered scraps by the largest operators. Altice could be persuaded to prematurely exit the American market and sell Cablevision and Suddenlink if convinced it has no chance of building adequate scale to stand with Comcast and Charter. Beyond that are smaller rural and regional operators including Mediacom, Midco, WOW!, GTT, RCN, and many others that serve fewer than one million customers.

Company executives may be hoping the objections to the AT&T/Time Warner deal are an anomaly for the Trump Administration. But it’s clear that whatever smooth waters exist for upcoming mergers will get choppy as the midterm elections approach. Should Democrats win back the House and/or Senate, life will get considerably more difficult for future media consolidation deals.

The French press continues to report, with some bewilderment, that U.S. consumers are being fleeced by the country’s biggest telecom companies while politicians do nothing to regulate a duopoly market or force more competition to stop the pick-pocketing. The Francophone press is responding to reports that cable baron Patrick Drahi is vacuuming up profits from his American subsidiary Altice USA — which owns Cablevision and Suddenlink — and is likely to get much bigger in 2017, all thanks to the U.S. regulatory landscape.

“Americans live under a corrupt politician-sanctioned broadband monopoly in many places, and this assures telecoms operators in the United States can earn astounding profit margins impossible in European markets,” notes Giga France.

Le Figaro reported this month Altice’s directors had an easy job figuring out where much of the global conglomerate’s future profits would come from: the United States.

“Given the structure of the telecom market, [Altice’s] margin for growth in France is low, whereas in the United States it is considerable,” the newspaper reported. The reason is a persistent lack of competition, made possible by politicians that accepted the recommendations of lobbyists and corporate special interest think tanks on how to structure the broadband market.

Drahi

In the United States, providers have won near-absolute control of their networks and need not share access with competitors. Large telecom companies argued that requiring shared access to their infrastructure would threaten investment and stall broadband network deployment. Ironically, some even argued it would lead to reduced competition. But the reverse turned out to be true and the United States has fallen far behind in competition and network quality, while more traditionally regulated markets in Europe now enjoy low prices, faster internet speeds, and a larger number of competitors vying for consumers’ business.

Wall Street indirectly conspires to keep the status quo by discouraging the entry of new fixed line providers, claiming it will destroy shareholder value and consume billions of investor dollars constructing competing networks that will be unlikely to attract enough subscribers fast enough to give shareholders a timely return on their investment.

With a provider-friendly Trump Administration in power, and more importantly the installation of Ajit Pai, a notorious telecoms-friendly regulator as chairman of the FCC, Altice’s directors consider 2017 to be one of the most inviting years for expansion in the United States.

Le Figaro reports there is plenty of opportunity for Altice’s empire to become more dominant in North America. In France, its SFR unit now holds a 25% share in the fixed line market, but that number is unlikely to grow much considering ongoing price wars that come from fierce competition in France. In the U.S., Altice only holds barely 3% of the market, and Drahi has made no secret he would like to become at least the second-largest provider in the United States.

Les Echos suggested Altice is quietly preparing a full-scale ambush on the U.S. market starting with a much-anticipated IPO expected this year. Wall Street doesn’t welcome Altice entering the U.S. cable business as a market disruptor. Instead, investment banks are willing to loan huge sums to Altice for the purpose of acquiring telecom companies, maintaining the existing duopoly of one cable and one phone company for the majority of Americans.

“In the past, every time he introduced a publicly traded asset, Drahi proceeded with acquisitions: Numericable, in 2013, SFR the following year; and by 2015 Cablevision and Suddenlink in the U.S.A.,” reports Les Echos.

In France, up to four providers compete head to head for fixed line telecom customers. In other parts of Europe, telecom networks are often forced open to competitors. Neither is the case in the States, and consumers are paying very high telecom bills as a result.

Les Echos notes the U.S. cable business is so lucrative, “never before has a French company made such an important investment in the country of Uncle Sam.”

Suddenlink and Cablevision: Consistent source for fat revenue growth for Altice.

Drahi told investors more than a year ago he wanted to eventually generate 50% of Altice’s business overseas, primarily in the profitable U.S.

Altice has so far only bought up smaller cable operators, but observers expect Drahi will aim for much larger targets, including the possibility of buying out a wireless provider or even targeting Comcast, AT&T, or Charter. Les Echos quotes Vincent Maulay, an analyst at Oddo who notes that Drahi may be able to collect future assets inexpensively if Verizon decides to move on an acquisition of Charter. Regulators will likely force the combined company to shed cable assets in New York State where Verizon and Charter currently compete. That would allow Drahi’s Cablevision to pick up divested service areas, perhaps even in Manhattan.

In just over two years after taking over one of France’s largest cell phone and cable operators — SFR/Numericable, more than 2.5 million customers have fled, fed up with Drahi’s initial lack of interest spending money on network upgrades and service improvements. It didn’t help that the prior owner — the conglomerate Vivendi — didn’t invest enough either, leaving the French cell phone company with headline-grabbing service outages, indifferent customer service, and a fear of employee suicides from threatened cutbacks and layoffs.

Even investors and the banks financing Drahi’s worldwide conquest of cable and telecom companies were concerned enough to apply pressure to stem customer losses that continued at a record pace for more than six months. The damage to SFR’s reputation has been so great, the wireless company has experienced two very bad years even with $2.3 billion in emergency spending to keep customers happy with service improvements while trying to win others back.

Paulin

Michel Paulin, in charge of SFR, told employees in an internal memo obtained by Les Echos things are still bad at the company.

“We have to face it: our customers are still not satisfied and far too many are still leaving for other operators,” Paulin wrote. “This year we will have to regain the confidence of our customers, but we will also have to return to growth in fixed and mobile broadband.”

That growth is still expected to come at the expense of jobs. By the summer of 2019, Drahi will have presided over the slashing of more than one-third of the SFR/Numericable workforce, amounting to at least 5,000 French workers. Many of Altice’s most recent investments are in content agreements to bolster programming for subscribers. SFR launched five sports channels, two news and information channels, and has spent heartily to acquire sports rights and programming agreements with American networks including NBCUniversal and Discovery.

Altice is also dramatically increasing spending on its news channel i24 News, which will soon be on the lineups of Cablevision and Suddenlink cable television customers. The news channel broadcasts multiple feeds in French, English, and Arabic and will supply viewers with international and Middle Eastern news, particularly focused on Arab countries where Al Jazeera delivers fierce competition.